Jumbo cabinet: Will it deliver? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Jumbo cabinet: Will it deliver? 

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In this issue:
» The largest cabinet in 10 years
» Finance minister's balancing act
» Rally doesn't equal to economic recovery
» Tatas enter infrastructure in a big way
» ...and more!

Big just got bigger! We are talking about the size of India's current council of ministers that is expected to touch a count of 79 (12 more than the previous cabinet), including the Prime Minister. That will make this the largest cabinet in the last 10 years!

While a large part of the Indian economy deals with competition on a daily basis and becomes more efficient, our governing class continues to burgeon, with perks to match. As per statistical reports from the government itself, the Central Government consumes more than 20% of the government's total revenue receipts in a given year.

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Although investors have great expectations from the new government, we must remember that this is not first time that the Congress party is in a commanding position in New Delhi. The way politicians have jostled for ministerial berths within days of the election results, certainly does not indicate that things will be different this time. Given the mandate the UPA has received this time around, what is required now is bold political leadership.

Speaking of the cabinet, India's finance minister, Pranab Mukherjee, certainly has a tough balancing act ahead of him. On the one hand, he plans to push for growth by spending funds raised from government borrowings. On the other hand, he plans to rein in the fiscal deficit at 5.5% of GDP. Mr. Mukherjee says, "We are committed to restoring growth and employment and that would not have been possible without increased spending funded by incremental borrowing. This would need to be further continued. We are equally committed to the process of fiscal consolidation over a period of, say, two-three years."

How does he plan to accomplish this? He will push for economic reforms, which will help attract investments, and in turn boost revenue. That will stimulate growth as well as improve the fiscal deficit situation. While investors seem to be responding really well to any mention of reforms, we believe much will depend on the actual execution of the plans.

The excitement over increasing the scope of FDI is likely to peter out to some extent if the revised guidelines are anything to go by. The department of industrial policy and promotion (DIPP) had earlier issued new guidelines to create the scope for a foreign firm to invest in sectors where FDI is prohibited. This was by setting up a joint venture with an Indian partner and holding a minority stake (anything up to 49.99%) in it. Further the guidelines stated that these firms would be considered Indian if they had an Indian management. However, the finance ministry and the RBI fear that these guidelines could be manipulated to invest in sectors in which FDI is prohibited such as multi-brand retail, atomic energy, gambling, agriculture and the like. Hence, they are contemplating coming out with revised guidelines to plug this loophole. Thus, while there are many expectations from the new UPA government to cast the FDI net wide, India does not seem to be ready for that just yet.

Image source: CNNMoney
CNNMoney calls it the US$ 4 trillion elephant in the room for policymakers. Just to put things in perspective, the amount equals to nearly four times India's GDP. But what does this amount mean to the Americans? Well, it is the all important bridge that they need to cross if they are to have any realistic shot at economic recovery. Currently, all the US citizens put together have outstanding housing loans worth US$ 10.5 trillion. As a percentage of GDP, it stands at 73%, a far cry from the 46% levels that existed during the 1990s. These extra loans will have to be repaid from their stagnant income, thus leading to a cut back in other areas of spending. Of course, there is a simpler option of defaulting on one's loans. But this would mean rising NPAs for the banks.

Either ways, the economy seems to be doomed. And to make matters worse, houses, which act as underlying collaterals are witnessing a huge correction in prices. In fact, at most places, they have gone to their 2002 levels and are still falling. Thus, while the value of the underlying debt has remained the same, the value of collateral has eroded massively. Little wonder, Alan Greenspan, the former chief of the US Fed was compelled to say that until the home prices flatten out, the US still has a very serious potential mortgage crisis. We couldn't agree more. Outstanding mortgage debt needs to fall to US$ 6.6 trillion - the US$ 4 trillion reduction that we referred to - if the previous purchasing power of the US consumer has to be restored. Of course, there are other options like lowering of interest rates and restoration of the credit markets but sadly, all of them look long drawn out and painful.

As per Mr. Rakesh Mohan, the Deputy Governor of RBI, the rally in equity prices does not indicate that an economic recovery is in sight. The central bank takes several indicators into consideration in it assessment of the economic situation - financial markets, industrial production, GDP growth, agricultural production, monsoon, bond markets. Hence, the RBI will not reverse its easy monetary policy just yet.

It may be noted that it has taken several steps to infuse liquidity in the Indian economy and prop up growth - slashing interest rates, reducing reserve ratios and buying back government bonds. In fact, as per the Wall Street Journal, the RBI plans to buy back government bonds to the tune of Rs 800 bn in 1HCY09. Interestingly, Mr. Mohan says that formulating monetary policy in India is more difficult than in other countries because of the juggling act required to balance administered interest rates, capital account controls and a big fiscal deficit. We wonder if the RBI has been able to avoid the financial meltdown because of some of these restrictions or in spite of them. In either case, credit must be given to our central bankers for being among the best in the world.

As the Indian urban centers continue to get crowded, opportunities lie in making more low-cost housing societies, airports, railways and bus stations. Evidently, Tata Sons through Tata Realty and Infrastructure (TRIL) and Tata Housing Development Company is going to invest Rs 200 bn in the infrastructure space in the next 3 years. It plans to build special economic zones in eight locations including cities like Chennai, Ahmedabad, Pune, Amritsar etc. It is also evaluating projects in metro railways, roads and highways.

These long-gestation projects are back on the radar due to low commodity prices, easy availability of sub-contractors and reviving demand. We welcome infrastructure building from all quarters - be it the government or private parties - as long as we execute our plans efficiently.

In the meanwhile, the BSE-Sensex ended higher by around 185 points or 1.3%, while the NSE-Nifty ended higher by about 60 points or 1.4%. Stocks from the metal and realty found favour, while stocks from the realty and pharma goods space bore the brunt of profit booking today. Most Asian markets ended the day on a strong note as well. The European indices were trading lower at the time of writing.

04:57  Today's investing mantra
"Wall Street makes its money on activity...You make your money on inactivity" - Warren Buffett
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5 Responses to "Jumbo cabinet: Will it deliver?"

Alok Misra

May 28, 2009

This government will not last full term and congress will not be able to regain states it has lost nor will it will ever make a come back into prominence.It has promoted political families without understanding what the people of India want.UP is never going to be a congress state in next fifty years and this cabinet is doomed from day one. I predict it will fall apart in about a years time!



May 28, 2009

Manmohan has been tom toming that he will make sure shot change change in the lokk & content of the cabinet. Unfortunately Sonia has not allowed him to drop most of the rotton old timers. Rahul made a big issue of dynastic politics & assured that in future this will not be allowed but see the cabinet and U will find only relatives. Most of the young faces have been ignored because sonia & manmohan are scared of talented people


N Kannan

May 28, 2009

5 Minute Wrap up of every day is extraordinarily brilliant. It provides very interesting material to read and in a language that everyone can understand. Very useful and I have become addicted to your wrap up.



May 28, 2009

Only time will decide what this jumbo cabinet will deliver.More or less with vast ruling expireance and good good fudamentals of indian economy will deliver positive results in future.Last but not the least Rakesh Mohan has rightly said equity rally is not the yard stick to measure the entire economy.
with regards,


rkgarg chartered accountant

May 28, 2009

small is beauiful in todays era. it is said eat light;travel light and work seriously. i do not see any benefit in having such a jumbo cabinet as it will worsen matters instead of sorting the same.the company which have lesser number of heads fare better than that is having more heads.

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